Russian Rescue Pledge Sends Ukraine Bond Yields to 4-Month Low

Andras Gergely

December 18, 2013 — 10:57 AM ESTDecember 18, 2013 — 10:57 AM EST

Ukrainian dollar bonds extended the biggest jump on record after a $15 billion Russian bailout pledge averted the risk of default, turning investor attention to the former Soviet republic’s longer-term solvency.

The yield on the government’s dollar notes due in June fell 14 basis points, or 0.14 percentage points, to 8.63 percent, the lowest since August on a closing basis. The rate dropped more than six percentage points yesterday. The hryvnia, which is managed by the central bank, gained 0.1 percent to 8.2850 per dollar at 5:37 p.m. in Kiev.

Russia will buy Ukrainian state debt this year and next and lower natural gas charges, President Vladimir Putin said after meeting his Ukrainian counterpart Viktor Yanukovych in Moscow yesterday. While the deal eased concern of an “imminent” sovereign default, it may lead Ukraine to defer changes, such as introducing a more flexible currency regime and reducing the dependence on imported gas, said Ivan Tchakarov, chief economist at Citigroup Inc. in Moscow.

“Russia’s influx of fresh money will ensure that Ukraine will easily fulfill its payment obligations next year,” Tchakarov wrote in an e-mailed report today. “The hryvnia is also likely to remain stable until the 2015 presidential elections.”

Six-month non-deliverable forwards on the Ukrainian currency fell 1.8 percent to 8.9150 per dollar today, the lowest since Nov. 29 on a closing basis, according to data compiled by Bloomberg. That reflects bets for a 7.1 percent depreciation in the period, compared with as high as 14 percent on Dec. 16.

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Ukraine’s government, faced with almost $17 billion of debt payments through 2015, is grappling with the biggest protests since the 2004 Orange Revolution after Yanukovych snubbed a European integration and trade accord last month in favor of repairing relations with Russia, which had opposed the deal. The country, a crucial east-west energy transit nation, is struggling with its third recession since 2008 and dwindling foreign reserves.

The cost to insure Ukraine’s debt against non-payment with five-year credit default swaps fell 263 basis points to 778 yesterday, the biggest decline in more than five years, according to prices compiled by data provider CMA. The contracts were at 765 today.

The Russian aid may help Ukraine cover its foreign-currency payments until the end of 2014, with a “cushion” for 2015, according to JPMorgan Chase & Co, which moved Ukraine sovereign bonds to marketweight from underweight today.

‘Upfront Adjustment’

“Longer-term economic fundamentals in Ukraine remain a concern and domestic political risk remains,” JPMorgan analysts, including Nicolaie Alexandru-Chidesciuc in London, wrote in a research report.

The government will boost pay for teachers, doctors and other state workers next year, Prime Minister Mykola Azarov said at a government meeting in Kiev today. Ukraine’s financial stability is guaranteed after the Russian aid deal, he said.

“Ukraine still lacks a business model,” Gillian Edgeworth, a London-based economist at UniCredit SpA, wrote in an e-mailed report today. The deal “avoids a sharp upfront adjustment in economic activity, but also means that any sort of sustainable growth path is out of reach, at least before 2016/2017,” she said.

The yield on the country’s dollar bonds due 2023 rose four basis points to 8.90 percent, after plunging more than 1 percentage point yesterday, data compiled by Bloomberg show.

Bank of America Corp., which moved Ukraine’s eurobonds to marketweight from underweight on Dec. 10, reiterated the recommendation today.

The notes will probably trade “very strong” in the near term, analysts Arko Sen and Vladimir Osakovskiy said in an e-mailed report today. “Ukraine’s deal with Russia is a significant shot in the arm. We keep our positive bias.”